By the Numbers

The GNPL market warms up before The Main Event

| May 19, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

BlackRock’s recent auction of a $420 million portfolio of Ginnie Mae project loan pools looks like an early test of the market ahead of an expected $12 billion auction of project loan REMICs in June. Relatively strong results on the smaller portfolio, owned by UBS through its acquisition of Credit Suisse, may portend well for the larger portfolio, owned by the FDIC after the collapse of Signature Bank. On the one hand, the UBS loans look likely to prepay faster than the loans backing the FDIC portfolio through the negative refi incentives likely to prevail in coming years. On the other hand, the buyer base for pools is quite small and typically limited to dealers trying to structure REMICs while the buyer base for the FDIC REMICs should include dealers, real money and leveraged investors.

Although BlackRock only releases auction results to buyers, anecdotal reports suggest most of the UBS portfolio traded well. BlackRock offered the loans in three groups: loans largely originated in 2020, largely originated in 2021 and largely originated in 2022. The 2020 and 2021 groups traded while 2022 did not. The earlier vintages had more property appreciation, which tends to raise prepayment speeds, and consequently may have attracted stronger bids.

Profile of the UBS portfolio

GNPL pools generally trade to dealers trying to package them into REMICs instead of end accounts, as their very low liquidity and long final maturity tends to leave most investors without a viable exit strategy.

The UBS portfolio was 100% construction loans and has a higher weighted average coupon, which means it is likely to prepay faster over time across all refi incentives.

Profile of the $420 million portfolio of UBS Ginnie Mae project loans that are 100% construction loans:

  • Construction loan issue dates between September 2020 and June 2022 (blue circles in Exhibit 1).
  • Note rates between 2.50% and 3.00% with a weighted average note rate of 2.85%. This is higher than the $12 billion FDIC portfolio from a similar timeframe, in part because the FDIC portfolio is primarily project loans.
  • On average, these construction loans are about 200 bp out-of-the-money to refinance based on current spreads between project loan commitment (PLC) rates and 10-year Treasury rates, which is still lingering wide. The spread as of April based on available data is 126 bp between PLC rates and 10-year Treasuries. During normal times, prior to the pandemic, that spread averages 90 to 100 bp. A normalization of the spread will lower PLC rates by 25 bp, increasing refinance incentives (or decreasing the disincentive) across the board.
  • Construction loan rates are higher than regular project loan commitment rates (red line) due to the greater risk of transitional properties. Once the loan converts it typically has a higher refi incentive, all else being equal, because the rates tend to be higher and the equity in the property has increased.

Exhibit 1: Construction loan rates of CS portfolio in market context

Note: Project loan commitment rates are weighted average monthly rates based on origination date. The CS loan note rates are as of the issuance date.
Source: BlackRock, Bloomberg, Santander US Capital Markets

Based on the higher rates and greater amount of equity, converted construction loans have historically prepaid much faster than project loans when there is a positive refinance incentive. Historically they have also tended to prepay slightly slower by about 1 CPR to 2 CPR when the refi incentive is flat to negative (Exhibit 2).

Exhibit 2: Historical GNPL s-curves

Source: Ginnie Mae, Santander US Capital Markets

Since the beginning of 2020, converted construction loans are now almost uniformly prepaying faster than project loans, even when the incentive to refinance is negative (Exhibit 3).

Exhibit 3: Recent GNPL s-curves

Note: The very deep out-of-the-money prepayment speeds (-300 bp or more) for construction loans post-2020 have smaller balances behind them, so may not be representative.
Source: Ginnie Mae, Santander US Capital Markets

It’s possible that borrowers with construction loans made in 2020 or later are using the additional equity gain to flip the property, whereas the borrowers with regular project loans are longer-term investors. If so, these higher CL prepay speeds may persist for the next few years even at flat to negative refinance incentives.

Profile of the FDIC portfolio

A detailed overview of the FDIC portfolio is in Shopping a $14 billion portfolio. Of the $14 billion portfolio, the $11.6 billion anticipated in June is comprised of GNPL securities issued in 2020 to 2021:

  • The weighted average interest coupon on the securities is 1.68% and the weighted average mortgage coupon of the underlying collateral is 2.77%.
  • At 15 CPJ the projected weighted average life is 4.4 years, but of course that’s not what anyone expects. A more reasonable model is anywhere from 2 to 7 CPJ, which would result in a WAL of 13 to 8 years.
  • Over the past 3 months the prepayment speed for the portfolio has averaged 1.3 CPR, but since issuance the CPR has been 4.5.
  • In addition to the current interest payment of 1.68%, the current principal payment is 2.55%, bringing the total monthly payment to 4.23%.
  • Construction loans in GNPL deals tend to average 10% to 30% of the collateral, compared to 100% in the CS portfolio.

Lower liquidity of pools

GNPL pools generally trade to dealers structuring REMICs instead of end accounts, as their very low liquidity and long final maturity tends to leave most investors without a viable exit strategy. On the upside, the pools still have the prepayment penalties attached since there hasn’t been any structuring. The GNPL securities in the FDIC portfolio are all long duration, last cash flow, principal and interest classes which don’t receive prepayment penalties.

Assuming the primary buyers of the UBS pools were dealers, they will likely use to the pools to mix in to future GNPL deals to diversify the collateral, either lowering or raising the WAC as desired, or perhaps tailoring the interest only class to suit a particular investor need.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles